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The Comparative Study of Mutual Influence among Money Supply, Big-Cap Stocks and Small-Cap Stocks in Our Country

Author: MengFan
Tutor: NiHe
School: Zhejiang Technology and Business University
Course: Financial
Keywords: money supply big-cap stocks in the stock market small-cap stocks in the stock market the VAR model
CLC: F822.2
Type: Master's thesis
Year: 2014
Downloads: 1
Quote: 0
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Abstract

Along with economic development, the central bank monetary policy for operating goals, intermediary goals, ultimate goals becomes increasingly experienced. Money supply, as an important intermediary goal, has a considerable impact on the entire financial market. After many years of development, stock market of China has scored tremendous achievements, but there are also some problems. In order to develop the stock market stably and healthily, CSRC has adopted a series of measures to standardize the stock market and protect the interests of investors. Stock market and money market obviously influence each other, which has become one of problems scholars are interested in. Big-cap stocks and small-cap stocks are in contrast to each other. Big-cap stocks stocks are attractive to investors for their investment value and dividends, while small-cap stocks are more attractive to investors for the change of price. The study of this difference makes the monetary policy and stock price becoming more and more closed. The money supply, one of intermediate targets, made by the central bank can be specific reference to the stock market. Choose effective monetary level to regulate stock market from money supply.The text in mutual influence among the money supply, big-cap stocks and small-cap stocks had carried on the theoretical analysis and empirical test. The theoretical analysis had three gradually promoting ways, including the money supply’s impacts on the stock market, the stock price’s impacts on monetary policy and differences between big-cap stocks and small-cap stocks. Using the theory above analyzed and compared the mutual influence among the money supply and big-cap stocks and small-cap stocks. We get a few results, which were the money supply affected small-cap stocks more directly and big-cap stocks affected the money supply more obviously. Empirical test selected the three levels of the money supply on behalf of the money supply, Csi100index on behalf of big-cap stocks and Small and medium-sized plate index on behalf of small-cap stocks. This paper analyzed trend and established the VAR model with data from2006to2013. The monthly data included Cash in circulation M0, Narrow money supply Ml, Broad money supply M2, Csi100index and Small and medium-sized plate index. For a little more analysis this paper used Granger causality test, model of impulse response, variance decomposition depending on the model above. As a result, the circulating currency M0and Narrow money supply M1could set up VAR model with Csi100index and Small and medium-sized plate index. Broad money supply M2could not set up VAR model with Csi100index and Small and medium-sized plate index. Cash in circulation M0, Narrow money supply M1had more obvious effects on small-cap stocks, which suggested the small-cap stock was more sensitive to changes in the money supply. Big-cap stocks affected the circulating currency MO, Narrow money supply Ml more directly, which suggested big-cap stocks had significant effects on the money supply. There were accordance and deviation between theoretical analysis and conclusions of empirical test. The part of reasons explained whether the conclusions above were consistent with economic theory and current situation of China’s economic development. Conclusions deviating from theory could be reasonably explained according to relevant economic theory, money supply level and stock market’s current situations. There were two aspects in the part of policy and advice, which were policy and advice from conclusions above, policy and advice for strengthening the contact among the money supply stock, small-cap stocks and big-cap stocks in the stock market. The policy and advice included that money supply needed to consider big-cap stocks, use targeted regulation of money supply to direct the stock market, build sound system of small and medium-sized retail investors’protections, make the rules in market system more and more perfect, broaden the species of investment in stock market and strengthen the education of investors who put their money in the stock market.

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CLC: > Economic > Fiscal, monetary > Currency > China's currency > Money management and circulation
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